World Bank warns of deep slowdown

The World Bank says the world economy will contract by 1.7% this year, the first decline since World War II.

The Bank says that the world's richest countries will contract by 3%, while world trade will fall by 6.8%.

Developing countries will grow by 2.1%, half the forecast six months ago, and some areas will fall into recession.

Meanwhile, the OECD, which represents rich nations, has published an even gloomier forecast, predicting that the world economy will shrink by 2.7%.

What began six months ago as a massive deleveraging in financial markets has turned into one of the sharpest global economic downturns in recent history

World Bank

The OECD forecasts that the contraction in rich countries will be 4.3%, "the deepest and most widespread recession in 50 years".

But the OECD says that the UK will no longer be the most hard-hit among major economies. While the UK is predicted to shrink by 3.7% this year, Germany's economy will shrink by 5.3%, Japan's by 6.6%, and the US by 4%.

Global summit

The World Bank's figures are broadly compatible with earlier projections from the IMF for a decline of 0.5% to 1% in world output, which were based on giving developing countries a bigger weighting in the overall figure.

The forecast predicts that developing countries will need $1.3tn in external financing to repay debt and cover balance of payments problems, and may fall short.

The gloomy news comes as the world's leaders are gathering in London for the G20 summit, aimed at co-ordinated action to counteract the downturn.

G20 LONDON SUMMIT

World leaders will meet later this week in London to discuss measures to tackle the downturn. See
our in-depth guide
to the G20 summit.

The G20 countries are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the US and the EU.

"What began six months ago as a massive de-leveraging in financial markets has turned into one of the sharpest global economic downturns in recent history," the World Bank says.

The World Bank's President, Robert Zoellick, warns that the crisis could have devastating effects on developing countries.

"These events could next become a human and a social crisis, with political implications," he said in a speech in London. "People in developing countries have much less cushion: no savings, no insurance, no unemployment benefits, and often no food."

Further action

And he warns that the G20 needs to take further action to boost spending - an issue on which they are deeply split.

"There is a greater risk in doing too little than in doing too much," he says.

"No one can be certain whether these [stimulus] packages offer enough stimulus for a long enough time," he added. "Global crises require global solutions."

The IMF and the World Bank say that there needs to be at least a 2% boost to the world economy, while the plans announced so far amount to 1.8% of GDP in 2009 and just 1.3% in 2010.

The World Bank also wants funding for a $50bn global trade financing programme, and has called for tougher monitoring of world trade to make sure that countries do not resort to protectionism.

And it calls for a bigger role for developing countries in the international financial institutions, led by an alliance between the US and China - the G2.

'Deep recession"

The World Bank says that high income countries have fallen into a deep recession, as the tight links between trade, exports and investment have now led to a "vicious circle".

As a result, Japan is forecast to suffer the deepest drop in output, with a decline of 5.3%, while the eurozone will contract by 2.7% and the US by 2.4%.

Among developing countries, the hardest-hit region is Eastern Europe and central Asia, where growth is predicted to fall by 2% this year.

Latin America is also likely to fall into negative growth, with the region contracting by 0.6%.

Growth in sub-Saharan Africa is projected to fall by half to 2.4%, barely above the growth of population.

And even East Asia, which has had an export-led boom, is likely to slow sharply, with growth in China projected at 6.5%, 50% less than last year.

The Bank says that developing countries will face serious problems with balance of payments, and may need external financing help of between $270bn and $700bn, depending on how quickly Western capital flees those regions.

Another key proposal on the table at the G20 would increase the resources of the IMF by up to $500bn to help bridge this gap.

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